Money Matters

Weak fundamentals

Money Matters
By Mehtab Haider.
Mon, 05, 18

The multiplying challenges on economic, political and diplomatic fronts are rising exactly at a time when Pakistan is on the verge of a political transition. The situation requires a high level of coordinated and harmonised response to steer the country out of the crisis mode.

The multiplying challenges on economic, political and diplomatic fronts are rising exactly at a time when Pakistan is on the verge of a political transition. The situation requires a high level of coordinated and harmonised response to steer the country out of the crisis mode.

The first and foremost challenge for the outgoing Pakistan Muslim League-Nawaz (PML-N) will be getting the approval of the National Assembly for passing the budget 2018-19 in a smooth manner.

The lack of quorum on the eve of the windup speech given last Friday by the Finance Minister Dr Miftah Ismail, poses fresh threats for the incumbent regime. If the PML-N fails to pass the Finance Bill, then the country might plunge into another political crisis.

If that was not all, Pakistan and United States relations are at the lowest ebb as well. Washington and Islamabad are indulging in tit for tat on account of imposing restrictions on the movements of their diplomats in each others’ countries.

Also, the sword in shape of Financial Action Task Force (FTAF) is hanging on our heads.

Among all these challenges, the most fundamental are the ones on the economic front. Pakistan is faced with the challenge of twin deficits, including the rising current account deficit, which is all set to cross even the revised projections made by the incumbent government. Earlier, the projections showed that things were under control, but it is evident now that it is spiralling out of control.

However, political parties and all others who are at the helm of affairs at the domestic front seem unperturbed by the emerging scenario.

Given this economic situation and that too at a time when US is embarking upon a path of surrounding Pakistan on different fronts, government must focus on the macroeconomic indicators.

It seems that Washington and New Delhi have evolved a consensus, and are on one page when it comes to increasing difficulties for Islamabad on all fronts in weeks and months ahead.

Sadly, none of this is bothering the political masters, who are more interested in completing their five-year tenure than they are in taking up complex macroeconomic issues. The bureaucrats in the Ministry of Finance too lack a grip on the matter and hence they fail to sensitise the political and military leadership about the emerging challenges and possible solutions.

The outgoing PML-N led regime has brought Special Secretary Finance Noor Ahmed into the fold of the Ministry of Finance. The special secretary has been assigned with the task to look after external the side of the economy, where the country requires dollar inflows to finance the yawning current account deficit. But the other team members, though they have excellent literary taste, do not have enough knowledge and expertise to tackle the rising challenges.

It has also been learnt that many of the bureaucrats switch off their cell phones after office hours, and it becomes difficult to reach them. This lacklustre attitude of policy makers has been aggravating threats for the economy. The policy makers also believe that the caretaker government, once it assumes power, will post them out of the Ministry of Finance. Perhaps this is what demoralises them and they are least interested in sensitising relevant quarters about future challenges on the economic fronts as well.

The question is what will happen on the economic front in the next few months. Despite exhausting all available options, including getting short term loans from Chinese banks (the government completed transaction of $1 billion on April 27, 2018) the foreign currency reserves held by the State Bank of Pakistan can hardly meet import requirements of over two months. The current account deficit has crossed $12 billion mark.

The annual plan 2017-18 had envisaged current account deficit at $9 billion (2.6 percent of gross domestic product) against $12.6 billion (4.1 percent of GDP) recorded during the previous fiscal year of 2016-17.

With estimated trade deficit of $29.4 billion and remittances of $20 billion by the end of 2017-18, the current account is likely to be in deficit by $15.4 billion (4.9 percent of GDP). However, in the first nine months of the current fiscal the current account deficit has already crossed $12 billion mark.

The trade deficit had already crossed $30.2 billion mark in first ten months, which means that the current account deficit would be bound to rise further. So, the chances of foreign currency reserves depleting further were quite clear.

The economic managers are hoping China is going to rescue Islamabad by keeping its safe deposits of up to $3 billion in the foreign currency reserves.

Based on positive global outlook, the Planning Commission has done forecasting of current account deficit on the basis of improved domestic infrastructure, energy supply and business environment, and higher exports in 2018-19 at $28 billion from $24.9 billion estimated for 2017-18.

On account of higher growth trajectory and planned economic activities under China-Pakistan Economic Corridor (CPEC), imports are expected to increase by 4.8 percent to reach the level of $56.9 billion in 2018-19 from an estimated total of $54.3 billion for 2017-18, implying trade deficit of $29 billion in 2018-19.

The economic managers also projected that CPEC-related imports, which stand at $10 billion in shape of machinery and raw material, would be slashed down in the next fiscal year as energy projects had entered the phase of completion.

Given higher level of imports, resurgence of exports and only modest growth in remittances, current account deficit is projected to be contained at $13.3 billion (4 percent of GDP) during 2018-19 as against estimated deficit of $15.4 billion (4.9 percent of GDP) by the end of the ongoing fiscal year.

Capital inflows are projected to increase from estimated $519 million in 2017-18 to $720 million in 2018-19. General government disbursements during 2018-19 are expected to remain at the level of $9.4 billion against $9 billion estimated for 2017-18, whereas amortisation is projected at $6.6 billion for 2018-19.

The Planning Commission envisaged in its annual plan that with given projections for current, capital and financial account balances, overall balance will result in $1.5 billion addition to reserves by the end of 2018-19.

But all these are mere positive projections based on wishful thinking. Even if Chinese promise of keeping couple of billion dollars into safe deposits and launching of Eurobond for bringing $2 billion was done successfully, the crisis on the external front will only be delayed for six to nine months period.

There is no other choice but to go back to the International Monetary Fund (IMF) in the next fiscal year. The sooner we accept the reality the lesser will be the pain. The planners must also keep in mind that the longer we delay the reform process, the more the pain and cost will be increased proportionally.

There is another risk even after approaching the IMF and that is food for thought for policy makers at the helm of the affairs. This time there will be a different IMF because Uncle Sam is unhappy and the Washington-based lender will lend in accordance with our quota even if Islamabad requests for an increased amount for the bailout package keeping in view its financing gap.

Planners must get ready for getting a refusal on the increased amount request. In the last programme, Islamabad had obtained more loan amount than its envisaged quota, after which Pakistan became eligible for Post Program Monitoring (PPM).

However, the external gap will continue haunting the economy over the next few years even after approaching the IMF. The economic managers projected gross financing requirement of $19 billion for the next fiscal year against revised projection of $21 billion for the outgoing financial year ending on June 30, 2018.

Pakistan will have to devise a strategy of short-, medium- and long-term for ensuring non-debt creating dollar inflows by increasing exports, luring foreign direct investment and boosting remittances as well as reducing reliance on imports. And last but not the least, the policy rate is bound to increase and exchange rate depreciation is on cards in months ahead, keeping in view the weak economic fundamentals.

The writer is a staff member